Beige Book Report: San Francisco
June 14, 1978
Retail sales, especially those of domestic autos, continue strong. High cattle prices are stimulating farm incomes. The forest products industry is booming and reports a serious shortage of railroad cars to deliver its product. Except for California, the Twelfth District is characterized by full employment. Bankers are generally unenthusiastic about the six-month certificates and consumer response at banks has been very modest.
Retail sales continue strong in the west. One Oregon observer notes that nominal sales are increasing at 15 percent annual rates. A survey in Tacoma, Washington, sees sales rising at an 8 percent annual rate. In Seattle, domestic auto sales are reported strong, but sales of imports are down sharply due to buyer resistance to price increases. In southern California, sales of most cars are said to be booming, but especially those of such luxury cars as Cadillac and Mercedes. New car sales are also reported strong in Utah.
In the agricultural sector, high cattle prices are reported to be bolstering farm incomes throughout the district, but there is some concern about Administration hints of raising the imported beef quota. Even though fruit and vegetable prices have been rising, good California weather is expected to flatten these out. Concern is expressed that current farm-land prices in California are not justified by the land's productive capacity, but rather by its value as an asset for foreign investors fleeing inflation or domestic investors seeking tax shelters.
The forest products industry is reported to be quite strong due. both to strong export demand and an expanding residential construction sector. There are, however, two major concerns in this industry. The first is that high mortgage rates (now 10 percent and expected by some to move to 11 percent) could pull the rug out from under housing sales and thus lumber sales. The second concern is over a serious shortage of railroad cars to get forest products out of the northwest—one observer claimed that the need is for 50 percent more cars than are currently available. A director who produces railroad cars confirmed this reported shortage by noting that his factories were experiencing tremendous backlogs.
In southern California the construction business (especially nonresidential) is still booming, though there is growing concern over rising costs of labor and materials. One director in the construction business claimed that rapidly rising wages accompanied by falling productivity (due to low and falling unemployment rates) had generated a 27 percent increase in labor costs over the past year.
Our directors were asked whether they felt that their local areas were characterized by full employment or whether there were involuntarily unemployed people who could be absorbed by a rapidly expanding economy. All western directors outside California portrayed their local economies as having a fully employed labor force. The Utah economy was said to be devouring a stream of new workers migrating into the area. In the Portland area, it was observed that there were virtually no skilled workers available, and this shortage of skilled workers was echoed throughout the district. The categories of unemployment still existing (i.e., students seeking summer jobs, migrant workers, some unskilled workers and central-city teenagers) were cited as not being amenable to reduction through a more rapidly expanding economy. On the other hand, six of our eight California directors felt that California was not yet near full employment. A dean at the University of Southern California notes that they are receiving hundreds of requests for interviews for both academic and staff positions. Several directors noted that California will move even farther away from full employment in the short run due to the public-sector layoffs stimulated by the passage of the Jarvis-Gann initiative (which cut property taxes by 60 percent).
Our banker directors were generally unenthusiastic about the new six-month certificate. The general feeling seems to be that: a) banks cannot compete with thrifts in this market due to the 114 percent differential and b) most purchases of certificates will be simply internal shifts anyway. All are offering the certificates at the T-bill rate. Only slightly more than half of the banks appear to be advertising the certificates, and most of this advertising seems to be of a minimal nature. Consumer response so far seems negligible to modest, though one Alaskan and one Washington bank did report favorable response. Practically all of the certificate purchases (80 to 100 percent) involved internal shifts of funds. The only exception was the Alaskan bank for which 45 percent of the certificates were new business. Most felt the certificates would have only a modest impact over the next six months, and generally that they would help to curtail outflows of funds rather than actually generate any new inflows. One director felt the only effect would be to raise the cost of funds and thus lower earnings.